A non-bank deposit taker that's holding about $55 million worth of public depositors' investments - and which is a subsidiary of an ASX-listed company - has had to re-issue its annual accounts after failing to disclose substantial payments its principals received through another company they control.

FE Investments (FEI), which styles itself as a lender to SMEs and which is one of 25 non-bank deposit takers that source money from the public and are regulated by the Reserve Bank, has re-filed its March accounts to now include various related-party transactions.

These include deals where First Eastern Securities provided corporate advisory and other services to FEI and was paid directly by borrowers of FEI.

First Eastern Securities is ultimately controlled by the founders (and current executive directors) of FEI, Thatt Kiong ('TK') Shim and Mel Stewart.

FE Investments, established in 2003 originally under the name of First Eastern Finance, is Auckland-based and has a 'B' long-term issuer credit rating with negative outlook through S&P Global Ratings (ratings explained here). After a reverse takeover last year, FE Investments became a wholly-owned subsidiary of an ASX-listed company now called FE Investments Group.

The directors say in the introduction to the new set of accounts for FE Investments in New Zealand that related party transactions that were material in "both nature and magnitude" were not disclosed in error. The directors had since instituted controls to identify and report on related party transactions going forward.

Note 7 in the restated accounts shows that First Eastern (which is ultimately controlled 50/50 by Shim and Stewart) received $2.39 million directly during the year from parties borrowing from FEI. The note also highlights other related party transactions that were not included in the first set of accounts, including the 'assigning' for 'consideration' of around $2 million of receivables to related parties and the issuing of preference shares to related parties.

The new set of accounts have now been given a qualified report by auditors KPMG, who say they haven't been able to obtain sufficient audit evidence to corroborate the completeness of the related party transactions.

"We note that the Company had not established adequate controls over the identification and reporting of related party transactions," the report says.

"We also note the circumstances of the restatement described in the Emphasis of Matter below. These circumstances require us to obtain significant corroborative audit evidence to independently support the information provided by the company over the completeness of related party transactions in order to issue an unqualified opinion on that aspect of the financial statements. We have qualified our opinion as we have been unable to practically obtain sufficient corroborative audit evidence over the completeness of related party transactions."

In terms of that 'emphasis of matter', KPMG says: "We draw attention to the Introduction and note 7 of the financial statements, which discloses that certain related party relationships, transactions and balances, which were material in both nature and magnitude, were not disclosed in error in the previously issued 31 March 2018 financial statements. As a result, the financial statements have been reissued on 31 October 2018 to correct that non-disclosure. The financial statements previously issued on 29 June 2018, may not be relied on in this regard. Our opinion is not modified in respect of this matter."

It then goes on to say in another note: "Note 2 to the financial statements sets out the Company’s non-compliance with requirements of its trust deed that relate to its related party exposure limit, concentration of debtors and its minimum capital. The note also sets out the actions being taken by the Company to address those matters with the Company’s supervisor. As part of our responsibilities as the Company’s auditor under the Financial Markets Conduct Act 2013, we have formally notified that non-compliance to Trustees Executors Limited in their role as supervisor of the Company."

In a new product disclosure statement that's just been issued, the directors of FEI say FEI works closely with First Eastern Securities Limited, which provides corporate advisory services in relation to financial facilities provided by FEI to its borrowers.

"Joint activities between FEI and First Eastern Securities Limited include selling down loans for the benefit of FEI (for example, to limit development loan exposure) or seeking funds from third parties to on-lend to borrowers or to securitise part of FEI's loan portfolio in order to raise funds for further lending activities.

"FEI is related to First Eastern Securities Limited by virtue of the fact that the directors of First Eastern Securities Limited are also directors of FEI as well as having beneficial interests in First Eastern Securities Limited through their family trusts.

"As part of lending to the SME market, FEI will also contemplate underwriting debt securities offered by issuers operating in the SME market.

"To this end, FEI works closely with First Eastern Securities Limited. First Eastern Securities Limited has expertise in arranging public issues of debt securities on behalf of SME companies. First Eastern Securities Limited derives fees for such services for which liability for payment of such fees is borne by borrowers. The fees due to First Eastern Securities Limited are funded by drawdowns under the facilities provided to the borrowers."

FEI's profit and loss account, cash flow statement and balance sheet were all unchanged after the reissue of the accounts.

The company lost $1.444 million for the year to March, compared with a profit of $1.213 million for the previous year. Included in the latest year was a receivables impairment expense of $2.348 million.

In the product disclosure statement the directors say that in the course of preparing FEI's financial statements for the year ended 31st March 2018 for the annual audit, FEI had to make various adjustments to revalue downwards its finance lease portfolio.

"In addition to FEI's collective provisioning policy, FEI has made loan provisions for individual impaired loans and allocated a more conservative level of specific provisioning for such loans. The adjustments and specific loan provisioning lowered the capital ratio and increased the exposure to Related Parties causing FEI to be retrospectively in breach of its capital ratio in April 2018 and related party exposure limit in March and April 2018.

"On 25 May 2018 FEI notified the Supervisor of the compliance breach and implemented a remediation plan. The remediation measures brought the capital ratio above 9% by a $400,000 increase in capital and reduced FEI's related party exposure to under the limit by a $100,000 repayment. The remediation measure took effect 31st May 2018."

The disclosure statement shows that the lending book includes 48% loaned to SMEs and 28% for property.

FEI has 13 loans greater than $1 million as at 31st March 2018 and these account for 50% of FEI's total loans.

In terms of the $55.453 million of term deposits (up from $44.209 million a year ago), the annual accounts say that 45% of these are held in Auckland, while 26% are held by non-NZ residents. It doesn't give the number of individual depositors.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.